The CGL “Business Risk” Exclusions

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I recently came upon an interesting case from the United States Court of Appeals for the First Circuit that examined the complex and confusing Commercial General Liability (CGL) “business risk” exclusions. Oxford Aviation, Inc. et al. v. Global Aerospace, Inc., 680 F.3d 85 (1st Cir. 2012) These exclusions were written to restrict coverage for claims relating to the repair or replacement of the insured’s faulty work or products, or defects in the insured’s work or products. They are frequently misread or misunderstood, particularly by claims adjusters who tend to see them as absolute bars to coverage for claims involving any damage to an insured’s work.

An aircraft owner (Airlarr) sued an aircraft repairer, Oxford Aviation, Inc., alleging negligent and faulty performance. Airlarr claimed that Oxford’s work on one of its planes left it with uncomfortable seats, leaking fuel injectors and a cracked turbocharger and a window that cracked when the plane was being flown back to Airlarr’s base from Oxford’s premises.

Oxford’s insurer, Global Aerospace, denied Oxford’s claim for a defense to the lawsuit based on the business risks exclusions. Oxford sued Global Aerospace for declaratory relief. Both parties filed for summary judgment on the duty to defend issue. The trial court granted Global Aerospace’s motion, holding that the claims fell within the exclusions. Oxford appealed.

The Appeals court did a very thorough analysis of the coverage grant and the four “business risk” exclusions (“your work” (exclusion J.6); “your product” (exclusion K); “products-completed operations” (exclusion L) and “impaired property” (exclusion M)), as well as the exclusion for damage to property in the “care, custody or control” (exclusion J.4) of the insured. It found that one of the allegations of damage (the cracked window) could escape all five exclusions and thus triggered the duty to defend.

Part of Oxford’s work was to reseal the window that cracked. However, the window cracked when Airlarr was flying the plane back home, not when it was in Oxford’s care, custody or control. Similarly, when looking at the “your work” exclusion (J.6), the court reasoned that while it was possible that the window was a “particular part” of property that Oxford worked on, the exclusion did not apply to damage occurring away from the Insured’s premises.

Reviewing the “your product” exclusion, all Oxford did was reseal the existing window. Therefore the window was clearly not Oxford’s product and the exclusion did not apply.

Finding the products-completed operations exclusion inapplicable, the court noted that for the exclusion to apply the window would have to be Oxford’s “work.” While Oxford did work on the window (by resealing it), there was no allegation or evidence that the resealing was the cause of the crack. The court opined that the most likely cause of the crack was Oxford’s performance of other heavy duty tasks on the aircraft that could have weakened the window or its frame. Importantly, the court stated “[w]ork on other parts of the plane can hardly convert the entire plane into Oxford’s ‘work’ where the contract assigned only particular tasks . . . .”

Finally, the court looked at the impaired property exclusion. Determining that a claim for loss of use of the aircraft could have been excluded, the claim for the loss of the window itself was not barred because the window was damaged and thus fell outside the definition of impaired property.

The court ended up with the conclusion that

This is a curious case. Reading the complaint against the exclusions, one must agree with the district judge that the underlying liability is only to Airlarr; that the alleged property damage to Airlarr, if proved as charged, likely traces back to defective work by Oxford; and that such damage to the insured’s client resulting from such a cause is what the business risk exclusions taken together hope to cabin, limit and usually preclude.

But for obvious reasons, (e.g., to cover consequential damages claimed by third parties), the CGL policy does not have an exclusion broadly written to exclude all claims from faulty workmanship. Rather, Global has crafted complex exclusions occupying several pages of text; and they have created an opportunity in some cases for a complaint to circumvent all of them. . . .

If Airlarr proves its case, it seems unlikely that there will be much, if any, indemnification since most of the claimed injuries appear likely to be covered by exclusions. But the duty to defend is triggered by any realistic possibility of any damage that might be within coverage and outside the exclusions . . . .

This case highlights how insurers have indeed written a confusing and complicated maze of exclusions. But it also shows how a detailed review of the allegations and the policy language, together with an experienced and resourceful legal mind, could find an open path to coverage – or at least pay for a defense to a lawsuit.